So far this year, the £355.5m Schroder Recovery fund has gained 22.18 per cent – the most in the entire IMA UK All Companies sector, which has averaged 11.48 per cent. It has also strongly outperformed its FTSE All Share benchmark over the period.
While the fund invests in out-of-favour stocks deemed too risky to touch by the market at large, it has been remarkably consistent, delivering top-decile returns in its sector over one, three, five and 10 years.
Performance of fund vs sector and index over 10yrs
| Name | 1yr (%) | 3yr (%) | 5yr (%) | 10yr (%) |
|---|---|---|---|---|
| Schroder - Recovery | 50.12 | 58.79 | 96.53 | 246.64 |
| FTSE All Share |
21.97 | 37.56 | 35.27 | 133.83 |
| IMA UK All Companies |
25.44 | 39.47 | 34.71 | 123.1 |
Source: FE Analytics
It has also achieved the feat in the extreme short-term, over one, three and six months. Julie Dean’s Cazenove UK Opportunities fund is the only UK All Companies portfolio that has been similarly dominant.
As well as being the top-performing UK All Companies fund on a cumulative basis, Schroder Recovery has outperformed the sector and index in seven of the last 10 calendar years, only lagging behind it in 2005, 2007 and 2011, according to FE Analytics.
Year-on-year performance of fund vs sector and index
| Name | 2013 (%) | 2012 (%) | 2011 (%) | 2010 (%) | 2009 (%) | 2008 (%) | 2007 (%) | 2006 (%) |
|---|---|---|---|---|---|---|---|---|
| Schroder Recovery | 20.63 | 34.05 | -14.1 | 15.97 | 49.18 | -27.11 | -3.52 | 21.56 |
| IMA UK All Companies | 10.89 | 15.05 | -7.04 | 17.53 | 30.4 | -31.96 | 1.85 | 17.38 |
| FTSE All Share | 9.8 | 12.3 | -3.46 | 14.51 | 30.12 | -29.93 | 5.32 | 16.75 |
Source: FE Analytics
Managers Kevin Murphy and Nick Kirrage took over the portfolio in July 2006, and since then have led the fund to the very top of the sector, with returns of 94.46 per cent.
Murphy (pictured) says the fund’s success comes down to its long-term, consistent process, which has not changed since the fund first launched back in 1970.
"The process has been the same forever," he said. "While the information doesn’t go all the way back to 1970, I’ve got reporting accounts that go back to the early 1990s and the fund managers then were writing the same things that we would write now.""The process has been very consistent, always buying the cheapest parts of the market."
Murphy says there are three key features he and Kirrage look for when selecting companies to add to the portfolio.
The first of these is, inevitably, valuation: the pair look at how much a company costs and if it appears expensive, it does not make the cut.
Next, Murphy says the quality of a company helps them to understand what multiple they are paying for the stock. He says this typically comes from the return on capital of the firm.
Finally, Murphy says they look closely at corporate balance sheets, to make sure they understand the nature of the firm’s debt and how they are handling it.
"We basically need to understand the pinch-points: does this company have sufficient resources to survive?" he added.
The managers say the ability to keep cool while investors are panic-selling is one of the most important skills to learn when running a recovery fund.
"We focus on cheap prices, but inevitably bad news goes along with it," he said.
"We were given an amazing opportunity in 2008 and 2009 to buy into some incredibly depressed cyclical companies and we put a large amount of money into these areas."
"That again worked in 2009 and 2010, and then 2011 was a very difficult year."
Murphy says investors became "skittish" in the summer of 2011 and sold out of stocks irrationally.
While this hit Schroder Recovery in the short-term, he says it allowed the team to pick up cheap, quality stocks, which has boosted performance ever since.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
"When you’re a value-based manager and people are selling for no reason, you’re going to get underperformance and that’s what happened," he said.
"But we didn’t lose our head and we kept buying companies we liked, and the fund has rebounded in 2012 and 2013."
"That isn’t always going to be the case in the short-term, but when you take a longer-term perspective, that outperformance becomes much more important."
Murphy says because the fund has rallied strongly, he is selling down some of the best-performing stocks in favour of more out-of-favour areas of the market.
However, he adds that there are not many opportunities at the moment because prices are so high across the board.
"There are very few ideas at the moment," he said. "There are some areas of significant opportunity, but investors need to be cautious of the market as a whole."
Murphy says there is still good value in financials – particularly banks – as well as interdealer brokers such as Icap and Tullett Prebon, and retailers such as Debenhams.
"It’s not a massively long list of companies at the moment," he added.
Mining is the only sector that has managed to remain uncorrelated to the wider market, according to Murphy, but he says the valuations still aren’t low enough for him to start picking up holdings in the sector.
"We are looking closely at mining but we’ve not found anything sufficiently cheap to buy," he said.
The managers typically hold between 50 and 70 stocks in the fund, with the current number at about 60 holdings.
"That’s likely to come down as we see the market concentrate down into fewer opportunities," Murphy added.
He says the fund has been helped by its ability to invest up to 20 per cent outside of the UK. It currently has exposure to five US companies – Pfizer, Apollo, Eli Lilly, Hewlett Packard and Dell – which have all helped to boost performance.
The highest sector weightings in the fund are to services and financials, with just 1 per cent in oil and gas. Among the fund’s top holdings are UK blue chip AstraZeneca, consumer electronics firm Dixons Retail and UK bank RBS.
The fund requires a minimum investment of £1,000 and has ongoing charges of 1.52 per cent. Hargreaves Lansdown’s Richard Troue (pictured) rates the fund highly, and says it is one he is keeping a close eye on.
"Overall, we’re reasonably positive on the guys," he said. "They are very value-focused and quite contrarian. They aren’t afraid to put quite a bit of conviction behind their ideas and that’s an approach we really like very much."
"It’s a fund we’ve got our eye on. It’s doing something a little bit different and [the managers] are certainly doing a very good job at the moment."
